The satirical newspaper The Onion recently poked fun at the concept of currency in an article entitled “U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion.” In the article, a very distraught Ben Bernanke, head of the Federal Reserve, exclaimed, “It’s just an illusion, just look at it — meaningless pieces of paper with numbers printed on them. Worthless.” This realization caused mass chaos on Wall Street.
However silly the idea is, on its face, money is actually worthless. Currency, like the U.S. dollar, has been used for centuries as a representation of something. That something is still debated today by economists. But when a new type of money was introduced in 2009, bitcoins, it was seen as different and exciting to many. They called this new type of currency cryptocurrency because it is based around the digital and internet community. But its relative freshness in the world is problematic, and people should be wary of jumping on the bandwagon.
Bitcoins as a concept were introduced in 2008 and created in 2009. Unlike most currencies, it is decentralized, which means there is no central government bank — such as the Federal Reserve Bank — to control it. That means there are fewer fees to do business, and it is theoretically easier to transfer funds instantaneously for very cheap. People can invest in the currency, and it is created by people who use computer power to complete transfers. But there is a cap of 21 million bitcoins in existence, which is the first problem with the currency as it stands today.
Bitcoins are capped, which means eventually there will not be any more created or bought. One of the most famous economic papers has to do with the “babysitting co-op.” A Forbes Article explains why bitcoins and the co-op are related.
“The story of the babysitting co-op is that a bunch of people agree to baby-sit for one another so that they don’t have to pay cash for adolescents. To make sure everyone does their fair share, the co-op uses coupons equivalent to an hour of babysitting time — sort of like an alternative currency,” the article explains.
However, this sort of co-op brings up another problem with new currency: it encourages hoarding. Currency is traded, which means investors speculate on its worth. In the past year, bitcoins have seen an impressive overall rise — up 3,000 percent since January. However, it also saw a few bubbles burst when it dropped almost 94 percent in just one week in April. These large rises and falls are risky for bitcoin investors. Speculators must realize that in the matter of days, this fad could end and they would be left with nothing. So people who are believers in the bitcoin are not incentivised to spend any of their currency. Joe Wisenthal of Business Insider explained it like this: “As more people have gotten into bitcoin, the price has gone way up. Virtually everyone who has ever bought anything in bitcoin has been a huge loser, who would have been better suited just holding onto the bitcoins instead. Remember the pizza that was purchased for $25 in bitcoins years back? Had the person not bought that pizza, it would be worth nearly $3 million. That purchase was a catastrophic decision, as that was probably the most expensive pizza of all time.”
How can bitcoin become a real currency if it’s not used in transactions? If people do not want to spend their money, then the currency itself is not doing a good job. Currency should be used as a means for trading and as a conduit. But bitcoins are not, and you should not jump on the bitcoin bandwagon. Because you really will feel like The Onion has hit too close to home when they “reported” on the mass chaos of realizing the worthlessness of money.
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